Gold: Signals of A Trend Change

Is gold’s bottom in? That question is top of mind of all gold enthusiasts. Of course, the bears still believe that gold will go through a hard landing.

The truth is that we are seeing mostly signals of a trend reversal, both in the very short run as well as in the bigger picture.

First, starting with the GLD, as we discussed in Why Increased Western Gold Demand Could Lead To A Gold Supply Shortage, the GLD ETF gold holdings increased from 793.16 tonnes on Jan 31st 2014  to 803.7 tonnes on Feb 27th 2014. That trend has continued in the past week. Tim Iacono writes today that the GLD has added 7.5 tonnes to its holdings for the third time in the last 8 weeks. These are the biggest daily inflows the trust has seen since late-2012 and they signal renewed interest in the metal by U.S. investors.

Western investment demand is indeed a key factor for higher gold prices.

Short term picture

What’s more, one could see a remarkable strength in today’s gold price compared to the other financial assets. Consider this:

  • US equities: The Dow Jones Index was down 0.41% and the S&P 500 index was down 0.51%.
  • European equities: The Euro Stoxx 50 was down 0.01%.
  • Crude oil was down 1.60%.
  • US dollar ended status quo.

Gold was up 0.72% on the day. One could argue that it was safe haven buying because of intensifying tensions in Ukraine. If that would have been the most important driver, then it would be reasonable to see higher crude oil prices as well (just like two weeks ago when the tensions in Ukraine broke out), which was not the case.

Although one day does not make a market, it is remarkable to say the least. So let’s look at what is happening in the bigger picture.

Big picture

Gold has been negatively correlated with US equities since November 2012. That trend seemed to be changing since the start of the new year. While equities saw a correction early February, gold has held up remarkably well. Since then, both the yellow metal and equities have gone up simultaneously. Does this spell the top of equities? Or will both assets start a period of a positive correlation? We do not have the answer, time will tell, but strength in gold is the most obvious conclusion at this point.

gold_price_vs_S&P_2012_2014

 

Likewise, US Treasuries seem to be topping in the larger timeframe. Since April 2013, gold and Treasuries have been negatively correlated. Although the negative correlation still holds, the trend seems to be reversing between both assets.

gold_price_vs_Treasuries_2012_2014

 

The US dollar has been historically negatively correlated with gold. It was clearly the case in 2012 and 2013, but that trend was interrupted in the last 2 months of 2013 and the first weeks of 2014. The trend has been re-established in the most recent weeks in favour of gold.

gold_price_vs_USD_2012_2014

Confirmation

Commodities as tracked by the CCI index have shown a positive correlation in the last two years. The CCI index has shown leverage in the same direction as gold’s moves. That trend hasn’t changed. We consider this as a confirmation of gold’s uptrend.

gold_price_vs_Commodities_2012_2014

 

Let’s be clear: a trend change needs confirmation over a longer period of time. So there is no guarantee that gold will not retest the lows of 2013 or will even go lower. But the relative strength in gold is crystal clear at this point, both in the short term and in the bigger picture. We believe gold’s strength is reflecting one ore several of the following underlying trends:

  • Increasing geopolitical tensions.
  • Loss of trust in central bankers’ policies, as evidenced by disappointing economic data.
  • Topping equities markets, driven by easy money.
  • Heating up of currency wars.

Only time will tell whether gold has established a long term bottom and which factors have been driving the trend change. But, from our perspective, we believe that all of the above are increasingly driving gold’s price higher, a trend which will only intensify in the months and years ahead.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing